Halcyon days limited for bond rally

UBS Hana Asset Management predicts that the rally in Korea's corporate debt is drawing to an end after yields fell to their lowest level in five years relative to government bonds.

Premium investors’ demand to hold three-year AA bonds instead of similar-maturity sovereign notes stood at 41 basis points on May 29, down 26 basis points from the start of the year and the lowest since September 2007, according to data compiled by Koscom.

The gap widened to 46 basis points on June 18 and may increase a further 20 basis points this year, according to Hwang Jae-hong at UBS Hana.

"Company bonds gained from October as, with the central bank holding rates, investors didn't see much opportunity in sovereign bonds," Hwang said.

"There should now be a technical widening in corporate spreads with investors starting to reap gains, although Korean companies' fundamentals are still strong."

Kia Motors reported a first-quarter profit that beat analyst estimates, and Samsung Electronics had its highest earnings in at least two years after beating Apple and Nokia in smartphone sales.

The International Monetary Fund cut its 2012 economic growth forecast for the nation last week to 3.25 percent from 3.5 percent and said the central bank has room to cut interest rates should growth weaken.

The average yield on Korea’ s corporate debt rated AA dropped 28 basis points this quarter to 3.76 percent, according to Koscom. Kia Motors is rated AA at Korea Investors Service and the yield on its 4.18 percent bonds due November 2017 increased four basis points, or 0.04 percentage points, this month to 3.85 percent as of June 18.

"With company note yields approaching record lows and Europe's debt crisis heightening financial market volatility, Korea's corporate spreads will widen for the next couple of months," Kim Ki-myung, a credit analyst for Korea Investment & Securities, said.

"Still, there is plenty of money waiting to invest in these securities for better yields, so the widening of spreads will be limited."

Bloomberg